Merkel's flawed vision for Europe, Ukraine-Russia and beyond

Merkel's leadership is being tested over how to pilot not only Germany but Europe, writes Hill [AFP]

Germany has been led by eight chancellors since 1949, and nearly all of them have been world-class leaders. Their vision and achievements have been immortalised in portraits that hang in the Gallery of Chancellors on the first floor of the chancellery building.

Helmut Kohl reunited west and east, Gerhard Schroder is credited with tough policies that restored Germany's competitiveness and exports. Willy Brandt, Helmut Schmidt and Konrad Adenauer, each in their own way, displayed a grand vision for domestic, European, transatlantic and global affairs that was epic-making.

After eight years in office, how does Chancellor Angela Merkel measure up against her predecessors? So far her signature achievement has been providing steady leadership during the cliffhanger turbulence of the eurozone crisis. Germany's brand of austerity economics initially had its place, with its emphasis on debt consolidation as a way of steadying the boat in rocky seas. But unlike her predecessors, Frau Merkel has had difficulty articulating her own grand vision capable of unifying the various dimensions of German and European politics. Indeed, Merkel is the first German leader since World War II who appears to have no grand plan for how to pull Europeans closer together, or to further Europeanise Germany.

Combined with new challenges such as the Russian reclamation of Crimea, Merkel's leadership is being tested over how to pilot not only Germany but Europe. Her policy of economic engagement with Russia as a vehicle for forging common bonds, which began under her predecessor Gerhard Schroeder (who subsequently became cozy with Gazprom and Russian energy interests as chairman of Nord Stream), now lies in tatters.

Counting the Cost - Who will save the euro?

Germany, as Europe's largest economy and most populous nation, has the power to veto any other member states' initiatives. But doing so is not the same as showing leadership. Chancellor Merkel's brand of always "do as little as possible" has broken with her many predecessors' bold trajectory that for over fifty years gave essential leadership and momentum to the European project and world affairs.

Social Democrats to the rescue?

With the inclusion of the Social Democratic Party (SPD) in the new grand coalition (GroKo), many hoped that it might act like a rocket booster to nudge the German government back into its historic leadership orbit. It may be too early to say, but so far it appears that the SPD does not differ substantially from Merkel in how it approaches either eurozone challenges or European leadership on the global stage.

The negotiated grand coalition agreement mostly reinforces "muddling through" as Germany's bipartisan approach to the eurozone. While foreign minister Frank-Walter Steinmeier of the SPD announced in early February a new foreign policy of greater global engagement, the rhetoric was stronger than the details and the recent Ukrainian crisis has resulted in more typical Merkel-like caution. Indeed, Merkel's (as well as other European leaders') reluctance towards more enlargement in general, and ambivalence towards Ukraine in particular since the days of the Orange Revolution in the mid-2000s, provided Russia the opening that led to the current crisis in Germany's near-abroad. Confusion has its costs.

While muddling through has been sufficient to get Europe through the worst of the economic crisis, it is highly unlikely that it will be successful in building a vibrant Germany or Europe for the 21st century.

Germany's clumsy economics

But Merkel's failed vision is most in evidence with her administration's continued insistence on policies focused on increasing competitiveness and reducing debt levels and inflation - otherwise known as "austerity". Austerity has only led to miniscule growth, high unemployment, borderline deflation and even higher debt levels for far too many member states. Germany and other northern European nations have been relying on large trade surpluses with southern Europe and the rest of the world to stimulate their economies. Germany's trade surplus has averaged a whopping 6 percent of GDP over the last decade, but it's not alone: Sweden's has averaged 7 percent during the same period.

Germany says "do as we do" to its eurozone partners, yet basic economics shows that not all countries can run trade surpluses at the same time. The world's overall current-account balances must ultimately sum up to zero because one country's exports are another country's imports; you cannot have one without the other.

Certainly Merkel has a point - that governments cannot simply run up unlimited debt. Her fellow eurozone leaders completely agree, even Greece, which for the first time in a decade had an annual budget surplus last year. But there's a flipside to that coin. For example, even though Greece and Spain's painful internal devaluation has resulted in a competitiveness gain of approximately 5 percent vis a vis Germany, the euro has appreciated 7 percent against the dollar and other international currencies over the past year.

Empire - The Debate - A German Europe? The Union disunited

So the euro's appreciation has wiped out most of the gains that would have allowed Greece and Spain to increase their exports outside the eurozone. This leaves Spain, Greece and others trying to do the impossible: service their rising debt burdens with a shrinking economy. Whatever were the initial benefits of budget consolidation and austerity as a way to steady the ship, at this point continued German-led austerity is threatening to sink Europe's fragile recovery.

Germans must recognise that it will be a very long time - if ever - that member states like Greece, Portugal, Italy, Ireland and Spain can be competitive with Germany. Now even the Netherlands has become the latest country locked in a vicious austerity cycle of cuts in government spending contributing to higher unemployment which has resulted in less tax revenue and greater deficits, followed by a doubling down on austerity to reduce the increased debt.

So as Germany celebrates a sense of having weathered the storm, for Spain, Portugal, Italy, Ireland and Greece the crisis has never subsided, despite their return to the bonds markets. Record unemployment, low growth and virtual deflation are crippling them, and Germany's "solutions" are akin to bleeding the patient to save her. Eurozone exit for one or more member states is still a real possibility, which would destabilise the still-fragile currency union.

At this point in the trajectory of the economic crisis, the policy alternatives to austerity are crystal clear: targeted stimulus spending (to jumpstart economic growth in the eurozone), more federalism (including transfers from better-off member states and debt-pooling in the form of Eurobonds), a robust banking union (that guarantees depositors and breaks the negative feedback loop between national banks and member states) and policies targeted to balance trade within the eurozone. But what has been lacking is the political will to do what is necessary. Even the Social Democrats seem unwilling to take the next obvious steps.

Certainly Merkel also is correct that budget discipline is necessary to keep Europe's economic model sustainable. Yet even here, Merkel and her finance minister Wolfgang Schauble have failed to advance a compelling economic vision or grand initiative for how Europe may succeed at this, other than to keep bleeding the patient by staying the course on austerity. At this point, such passivity in the face of Europe's existential challenge is woefully inadequate.

The tug-of-war with Russia over Ukraine shows how important it is that Europe put itself on a course that is stable, prosperous - and unified. Europe needs the right kind of leadership and, while there is much to admire about Germany, unfortunately German leadership appears to be the wrong kind for this important moment.